Euro area banks have emerged from the latest round of EU-wide stress tests looking robust, buoyed by strong capital positions and a run of high profitability. But supervisors and researchers are increasingly focused on a harder question: how to monitor vulnerabilities between official stress-test rounds—and how to detect risks that standard exercises are not built to capture.
A growing body of work argues that one answer lies in turning stress-test outputs into high-frequency “depletion” indicators that can be tracked quarter by quarter. Two measures stand out: a Stress Vulnerability Index (SVI), which gauges how sharply bank capital could be eroded in severe but plausible tail events, and a Profitability Vulnerability Index (PVI), which focuses on the fragility of earnings that normally replenish capital over time. Both indices are designed to convert complex stress-test data into a set of signals that can be monitored continuously, rather than only when the next test is published.
Beyond pass–fail: measuring conditional capital depletion
The SVI builds on a simple premise: what matters for resilience is not average performance, but how banks behave when losses cluster—when credit risk is most acute and the system is under strain. Using granular information gathered through EU-wide solvency stress tests, the index summarises “conditional” capital depletion—how much capital ratios might fall under adverse conditions that coincide with high tail credit risk.
This is particularly relevant because standard EU-wide tests rely on a defined methodology that, by design, does not reflect the full range of shock transmission channels. Official exercises commonly assume that banks keep lending broadly unchanged over the scenario horizon. That assumption helps comparability across institutions, but it can understate feedback loops between banks and the broader economy. In real crises, banks often cut loan books and shed higher-risk exposures, actions that can protect capital but deepen economic contractions.
The 2025 macroprudential stress-test extension work, which overlays a top-down system-wide model on bottom-up test results, illustrates the point. In simulations where banks are allowed to adjust balance sheets dynamically under a severe adverse scenario—marked by a prolonged recession, a market slump and persistent inflation linked to global fragmentation—banks materially reduce lending. The model suggests that while this can marginally improve capital ratios compared with a constant-balance-sheet assumption, it comes with macroeconomic costs: an additional cumulative contraction in real GDP of roughly 2 percentage points after three years, relative to the starting point.
The earnings channel: why profitability vulnerability matters
The PVI targets a different but equally important mechanism: the durability of profits. In recent years, profitability has acted as a stabiliser for many euro area banks, supporting organic capital generation and cushioning losses. But earnings can be more sensitive than capital ratios suggest—particularly when funding costs rise, asset quality deteriorates, or fee and trading income weakens.
By translating stress-test information into a quarterly gauge of earnings vulnerability, the PVI aims to flag when a banking system that appears well capitalised may nevertheless be at risk of a rapid deterioration in profit capacity. That matters because profits are the first line of defence: when earnings drop, capital replenishment slows, and the system can become more reliant on buffers just as they are being drawn down.
Capturing what standard stress tests miss
The most recent macroprudential extension work reinforces why these indices may be useful. It highlights “pockets of vulnerability” tied to risks that are not fully covered in the EU-wide framework, including contagion dynamics, climate shocks and feedback effects from deleveraging.
In system-wide simulations of spillovers from non-bank financial intermediaries, investment funds—particularly equity funds—are found to take the largest hit, followed by insurers. Banks are generally better insulated, with limited additional average depletion in their core capital ratios because many hedge market risks. Yet the same analysis indicates that weaker hedging capabilities can leave some banks more exposed, supporting the case for granular monitoring rather than relying on system averages.
Climate risk modules provide another example. When adverse macro-financial scenarios are expanded to incorporate transition pressures consistent with widely used climate pathways, projected credit risk losses rise by around 70 basis points, driven largely by exposures to energy-intensive sectors. Adding physical risk from flooding produces a comparable increase in estimated credit losses. The message is not that banks are uniformly vulnerable, but that additional shocks outside the baseline stress-test design can meaningfully shift loss projections for some institutions.
Implications for capital buffers and policy
These findings are feeding into a broader policy debate about capital buffers. The extension analysis supports a cautious approach: banks look resilient in the headline test, but releasable macroprudential buffers are still relatively limited in size, and releasing them offsets only part of the credit tightening that can occur when banks protect capital by cutting lending. Continuous, quarter-by-quarter indices such as the SVI and PVI are presented as tools that can help policymakers time buffer decisions—tightening when vulnerabilities build, and releasing when the system risks amplifying a downturn.
Why it matters
Stress tests offer a snapshot; depletion indices aim to provide a moving picture of bank fragility as conditions evolve. By tracking capital and earnings vulnerability quarterly, supervisors may spot problems earlier—especially those linked to non-bank contagion, climate shocks or credit-supply feedback loops. In a system where resilience can coexist with concentrated weak spots, better monitoring can help prevent small vulnerabilities from becoming economy-wide stress.